Research Dept. News
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Monthly Report, num 310 - February 2008
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European Union - United Kingdom
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United Kingdom: consumers feeling hurt or even depressed?
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Sudden weakening of private consumption in United Kingdom troubling.
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Will the United Kingdom escape from major slowdown in growth? This will largely depend on whether consumption manages to avoid a collapse and resist the tightening of loan terms and a more negative general economic situation than has existed in recent years. For the moment, there is no sign of any rapid end to the process of adjustment in household spending. An example of this is to be found in one specific indicator and a statement. The indicator, retail sales, grew by a weak 2.7% year-on-year in December, its worst level since September 2006 and less than half the rate seen a mere three months before in September 2007. The statement, by Stuart Rose, executive director of Marks & Spencer, pointed out that balance for the past Christmas season was «...the worst I’ve seen in a decade».
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Other indicators also support analysis of an economy fast losing strength.
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Indicators pointing to the future, such as the prospects component of the consumer confidence index, clearly suggest that the process of containment of private consumption is not ended. Along the same lines come forecasts by various analysts that household consumption may not rise before the end of 2008. Other indicators, such as industrial production, which grew by a modest 0.3% year-to-year in November, and economic sentiment, support the idea that the economy’s drive is on the wane. Practically the only relief comes in the positive situation in the labour market, with an unemployment rate stationary at 2.5% between October and December.
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Bank of England likely to cut interest rates but whether this will fully revive economy remains unclear.
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In this situation, will the Bank of England come to the rescue? There is no lack of urging. As well as the comments by Stuart Rose, Alistair Darling, Chancellor of the Exchequer, has declared that in his view the central bank had sufficient margin for manoeuvre in monetary policy to lower its intervention rates. The problem faced by the Bank of England, however, is that it must hold inflation prospects firm. (While inflation stood at 2.1% year-on-year in December, forecasts suggest an upward thrust from these levels.) The central bank must also avoid weaking the pound sterling even more and try to salvage growth. According to most views, the balance of risks lies more in the latter factor but even so the United Kingdom may not be able to prevent an economic standstill. For the moment, according to early estimates, growth in the fourth quarter was 2.9% year-on-year as against 3.3% in the preceding quarter. The adjustment has thus already begun.
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